The Charity Commission yesterday vetoed a ruse that would have allowed NHS foundation hospitals to treat more fee-paying private patients. It denied charitable status to a company that was set up to arrange operations for private patients at an NHS hospital in Salisbury.

The commission said Odstock Private Care was established with a loan from Salisbury NHS Foundation Trust "to carry out private patient work using Salisbury district hospital facilities".

The plan was to circumvent a statutory limit on foundation hospitals increasing their income from fee-paying patients and insurance companies.

The rule was written into the legislation setting up foundation hospitals in 2002 when Alan Milburn, then health secretary, was trying to calm Labour backbench opposition to giving the foundations independence from Whitehall control.

The company said its objectives were "to relieve sickness and preserve and protect the health of patients".

But the commission decided Odstock's services were "not shown to be available to the public at large, but only those with the ability to pay its fees".

The ruling cast doubt on attempts by other foundation trusts to increase their income by finding ways around the legislation. Sue Slipman, director of the foundation trust network, said several of its members are trying to set up joint ventures with private companies. The companies would pay to use NHS facilities to treat private patients, boosting the foundations' income to the benefit of NHS patients. She said the trusts were concerned that these arrangements might fall foul of the statutory cap on private work. "The Charity Commission has made a clear decision in the case of Odstock. But other foundation trusts ... may still wish to consider whether or not an application for charitable status would be appropriate," she added.

Monitor, the regulator of foundation trusts, said it will review procedures that have allowed hospitals to avoid declaring income from private patients in annual accounts. After a threat of legal action by the public service union Unison, it said the question would be reconsidered at next month's regulator's board meeting.

Andrew Hind, chief executive of the Charity Commission, said the Salisbury hospital ruling had wide-ranging implications. "This decision is not unique to hospitals looking to meet an increased demand for the private use of their facilities by setting up a charity. Any organisation looking to register as a charity has to exist for the public benefit."

A spokesman for Salisbury foundation trust said: "It [the company] took legal advice and decided to divest itself of the vast majority of its private work to an independent company."

A spokeswoman for Odstock said the company was disappointed by the ruling.